Recovery in the quality of high-margin assets following a higher interest rate regime drives results
Loan and asset growth in UAE banks edged up 0.7%, while deposits grew 5.2% quarter-on-quarter. Photo for illustrative purposes. – Stock photo
The profitability of the top ten UAE banks in the third quarter of 2022 jumped on higher core interest income despite slowing growth in loans and advances, according to a major global professional services firm.
Aggregate net interest income (NII) jumped 12.2% quarter-over-quarter while net interest margins (NIM) improved 18 basis points (bps) from a quarter-over-quarter (QT) supported by higher credit yield on the back of higher benchmark rates, Alvarez & Marsal (A&M) said in its UAE Banking Pulse report.
Total interest income increased significantly by 27.5% as asset quality improved, while non-performing loans (NPL)/L&A fell from 0.2% to 5.5% in course of the quarter.
“With the tailwinds of stronger economic growth and higher interest rates, UAE banks have seen improved profitability. Third quarter 2022 earnings momentum accelerated with strong margins and improving asset quality. We expect the improving trend to continue in the fourth quarter, but remain cautious about the effect of rising rates on individuals and businesses,” said Asad Ahmed, A&M Managing Director and Chief Services Officer. finance in the Middle East.
Abdulaziz Al Ghurair, Chairman of the UAE Banks Federation, predicted positive and robust growth in the UAE banking sector and predicted that the banking sector would grow faster than the macroeconomic rate with banking revenues, after provisions for risks, to reach more than 25 billion dollars by 2030, a 50% increase compared to current revenues establishing an excellent financial situation. He noted that banks in the UAE are well capitalized and profitable, which is a precondition for enhancing long-term stability in the sector.
The 10 largest listed banks analyzed by A&M include First Abu Dhabi Bank, Emirates NBD, Abu Dhabi Commercial Bank, Dubai Islamic Bank, Mashreq Bank, Abu Dhabi Islamic Bank, Commercial Bank of Dubai, National Bank of Fujairah, National Bank of Ras Al Khaimah and Sharjah Islamic Bank.
Loan and asset growth edged up 0.7%, while deposits grew 5.2% quarter-on-quarter. Overall, while interest rate hikes in the third quarter had a positive impact on banks, the impact on borrowing is more muted, despite positive economic activity in the GCC as the International Monetary Fund revised up its UAE GDP forecast from 4.2% to 5.1% in October 2022, the report said.
“Overall, banks reported higher profitability, with return on equity improving 1.3% qoq to 15.1% and return on assets 0.1% qoq. to 1.7% in the quarter, thanks to stronger economic activity, higher interest rates and higher oil prices,” he said.
Banking operating profit increased significantly by 8.3% quarter-on-quarter, mainly due to the increase in the NII for banks in the United Arab Emirates. The NII increased substantially by 12.2 percent QoQ. The increase in other operating income of 8.0% quarter-on-quarter was offset by a decrease in net fee and commission income of 7.8% quarter-on-quarter. As a result, overall non-interest income fell slightly by 0.1% quarter-on-quarter.
Operating cost efficiency improved for the second consecutive quarter. The cost/income ratio improved by 1.0% to 30.5%, mainly due to an increase in operating profit of 8.3% QoQ which exceeded growth of 5.0% QoQ operating expenses, the report says.